Many people treat their family business funds as their personal piggy bank. They charge personal expenses to the company. They believe that “since this is our family business, and I am part of the family, then the money is mine.”
Founders sometimes encourage this practice, bragging to friends they provide everything for the clan. Family members who are not paid enough have become dependent on largesse from the patriarch or matriarch, and even after the former’s demise, they expect to remain substantially provided for by the business.
What to do? Differentiate between ownership and management. Family members with shares in the business are entitled to regular dividends, while those who are working in the enterprise are entitled to market-determined wages comparable to what they can earn outside the family fold.
In many cases, family members are both owners and executives. Thus, they should be getting both dividends (based on profits) and salaries (based on market rates). The amounts are not subject to the whim of the founders.
Professional accountants may need to step in to determine the financial state of the business and human resource managers should canvass the going rates of executives. The board may need to determine how to apportion net funds, while considering business targets, expansion plans, etc.
Family members need to learn to live within their means. More often than not, they cannot do so. Parents who cannot bear to see their children endure a little discomfort keep on providing for them. They do not realize they are contributing to their children’s sense of entitlement, which is likely already causing conflict in the business and family.
“Dependence on subsidies… is an addiction that is as serious as dependence on alcohol or drugs,” says US family adviser James Hughes Jr. in his book “Family Wealth.” “It saps the human and intellectual capital of a family faster than almost any other single liability on the family balance sheet.”
A family fund is essential to minimize conflict. Separate from business funds, a family fund may be endowed by the personal monies of the founders, or agreed-upon percentages from the business which might otherwise have gone to dividends, philanthropic purposes and even corporate expansion.
Charity begins at home. A family fund can provide resources in times of emergencies or for projects deemed salutary by the board, such as providing for the training of a promising youngster expected to work with the family.
“The family bank should not be a formal institution,” says Hughes. “It isn’t a bank in the normal corporate sense … But it must have formal rules for meetings… [and] procedures for receiving and processing loan applications… The family bank must have a mission statement explaining its philosophy and reason for being. The lenders and borrowers must understand the family bank’s purpose—to be a high-risk, low-interest lender—and the consequences of that policy.
“When a family’s leadership brings to view distributions to individual family members as enhancement loans, and family members agree to formally apply to the family bank when seeking such loans, a family makes real progress in combating remittance addiction.”